Apportioning the risk of delay in construction projects: a proposed alternative to the inadequate 'no damages for delay' clause.

• Author: Beattie, Carl S.

INTRODUCTION

Construction is a risky, competitive, and litigious business. (1) Each new construction venture may bring together hundreds of parties--including owners, architects, engineers of all varieties, general contractors, subcontractors and suppliers--many of whom have never dealt with each other on previous projects. The design of most projects is a new creation, often incomplete when construction begins. Every construction site is unique. Labor conditions, weather, material availability, and any number of other factors are difficult to predict. Knowing little of what the future holds, the parties nonetheless proceed to estimate how much the project will cost, estimate how long it will take, contractually bind themselves accordingly, and hope for the best.

Among the most obvious and common risks in the construction industry is the risk of delay. As one court has noted, "except in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project...." (2) Even the most successful projects--in the sense that all contracting parties walk away financially satisfied--are rarely completed precisely according to the original construction schedule. Despite the fact that delays are commonplace, the reality of a competitive bidding process requires that most contractors carry little or no contingency for delay. (3) Delays can have devastating economic effects on both owners and contractors. In fact, even when other problems occur on a project, the associated delay is usually the most expensive consequence. (4)

Not surprisingly, parties have sought means of shifting the risk of construction delay away from themselves. One mechanism used towards this end is the common contractual provision known as a "no damages for delay" clause. Imposed on general contractors by owners or on subcontractors by general contractors, a no damages for delay clause essentially states that the contractor will not be entitled to monetary damages in the event of a delay. These clauses are often used in connection with a statement that a time extension is the sole remedy for the contractor's delay. (5) Such a clause may be worded as follows:

In the event that Subcontractor is obstructed or delayed in its performance of its work by Contractor or Owner, Subcontractor will be entitled to a reasonable extension of time. It is agreed that the extension of time will be Subcontractor's sole and exclusive remedy for such obstruction or delay, and that in no event will the Subcontractor be entitled to recover damages from Contractor or Owner for any such obstruction or delay. (6) No damages for delay clauses can vary widely in scope. At the broadest end of the spectrum, some construction contracts use language that damages are unavailable for delays resulting from "any cause whatsoever." (7) The example quoted above represents a middle ground in which the clause covers delays caused by the contractor or owner. An even narrower clause may apply only to force majeure events. (8)

No damages for delay clauses in construction contracts have always been very controversial. They often lead to inequitable outcomes and harsh results for contractors delayed through no fault of their own. On the other hand, there are numerous practical and theoretical arguments in favor of their enforcement, not the least of which is the foundational principle of freedom of contract. (9) Because these clauses are so exculpatory in nature, courts scrutinize them carefully. (10) Although no damages for delay clauses are not invalid per se in most jurisdictions, close judicial attention has led to the development of numerous well recognized exceptions to their enforcement. (11) One commentator has analogized the evolution of the law in this area to a tennis match, in which no stable and suitable end is in sight. (12)

This Note argues that no damages for delay clauses are an insufficient mechanism for apportioning delay risk in construction contracts due to the convergence of two main factors. First, delay damages can be amazingly complicated, expansive, and difficult to calculate, even after a delay has occurred. Second, the enforceability of no damages for delay clauses is sporadic and varies by jurisdiction. The result is an exponential uncertainty, which leaves contracting parties helpless to put any kind of accurate value on their exposure at the inception of a project, the time when key economic decisions must be made.

Part I of this Note summarizes the current law regarding enforceability of no damages for delay clauses and the judicial exceptions that have developed. Part II examines some of the practical and public policy considerations that have shaped the jurisprudential landscape. Part III provides a brief overview of delay claims and damages generally, the complexity of which must be understood to gain more thorough insight into the ineffectiveness of no damages for delay clauses. Part IV weighs all of the factors introduced in the earlier Parts and concludes that the no damages for delay clause is an undesirable solution to the challenge of managing delay risk in construction contracts. Finally, Part V examines potential alternatives to the no damages for delay clause and suggests that a combination of provisions that limit the delay damages recoverable by a contractor--rather than completely denying any recovery--would be a more balanced solution.

1. ENFORCEABILITY OF NO DAMAGES FOR DELAY CLAUSES AND THE COMMON EXCEPTIONS

   In most jurisdictions there is no per se rule concerning the enforceability of no damages for delay clauses. (13) Most courts begin with a presumption that these clauses are valid so long as they are clearly drafted. (14) As noted above, however, courts will generally construe no damages for delay clauses strictly, because they are exculpatory in nature and because the consequences of enforcement can be very severe. The result of this careful judicial scrutiny has been the development of a considerable list of widely recognized exceptions under which a no damages for delay clause will not be enforced. Most courts and commentators cite four to six basic exceptions, (15) but some of these are really generalizations that encompass several different considerations. There is, however, a common principle behind all of the exceptions--the fact that many courts simply do not want to enforce a no damages for delay clause when it is unreasonable or inequitable to do so. (16) Consequently, the applicability of specific exceptions varies considerably from state to state and even from court to court. This reality makes it difficult for contracting parties working in multiple jurisdictions to gauge the value of these clauses with any regularity.

   1. Exception for Delays Not Contemplated by the Parties

      Even if otherwise enforceable, a no damages for delay clause often does not bar claims for delays not contemplated by the parties at the time of contracting. (17) The rationale for this exception is simple. While the contractor may be responsible under the clause for the risk of common and expected delays, some courts find it inequitable also to hold the contractor responsible for delays that were completely unexpected and outside the parties' original contemplation. This exception has been applied to delays resulting from a wide range of occurrences, including: a city's failure to obtain a sewer right-of-way after assuring the contractor it would do so; (18) unexpected default of other contractors; (19) and a state's submission of misleading and inaccurate plans to the contractor. (20) Conversely, the delay was considered to have been contemplated by the parties--and the no damages for delay clause enforced--in a case in which the owner expressly advised the contractor of the possibility of unmarked or improperly located utilities. (21) In a somewhat more surprising example, a no damages for delay clause was also enforced when a wall adjacent to a construction site collapsed and killed two workers and construction was delayed until the safety of other walls could be certified. (22)

      The difficulty with the "delay not contemplated by the parties" exception is that the dispositive factor is the foreseeability of the specific type of delay that occurs. Reasonable minds may of course differ as to what delays are foreseeable. A strong argument could be made that the players in the construction arena ought to expect the unexpected. In fact, any long established entity would have to look no further than its own project history to discover an amazing array of delays stemming from all causes imaginable. Given this undeniable characteristic of the industry, it may not be reasonable for a contractor to defend his claim for delay damages with the argument that he thought this job would be different. In any event, courts will sometimes look to other provisions in the contract in an attempt to determine what specific types of delays were contemplated by the parties. (23) For example, if a contract contains express language dealing with site conditions, as many do, it is not likely that a court will find delays resulting from adverse site conditions to be "not contemplated by the parties" for the purpose of a no damages for delay clause analysis.

      The exception for delays not contemplated by the parties is perhaps the broadest of the exceptions. This exception is so broad because many courts find that where another exception applies--for example, that the owner has "actively interfered" with the contractor's work--the delay was also not contemplated. Many opinions that could be based exclusively on other exceptions, therefore, also contain references to the lack of foreseeability of the delay. (24)

      The exception for delays not contemplated is also the most varied exception in terms of state-by-state...